Turkish Law Blog

Conclusion of Contract and Sources of Contract Terms

Ulaş Devrim Ünal Ulaş Devrim Ünal/ Tecnicas Reunidas
22 November, 2019

What is a contract? A contract can be defined as an agreement entered into between two or more parties (individuals, or entities) that creates obligations and rights and these obligations and rights are legally binding for parties. Depending on the type of contract, in some legal systems, the contract has to be written and signed for being legally binding while under some others even a verbal agreement can be held as conclusion of legally binding contract.

For a contract, there shall exist an offer and acceptance of the offer. The contract is held as concluded when consensus in idem is reached which can be described as meeting of minds. In other words, the understanding of offering and accepting parties on all essential terms of the agreement shall be the same. The offer shall be clear enough including the essential terms such as price, quantity, delivery terms, payment terms etc. It can be challenged that the contract is not concluded by the acceptance of the offer since the offer lacks the essential elements. The contract is not concluded when the acceptance of the offer comes after the expiry of offers validity period. If the offer does not contain any validity term, English law considers that the offer is open to acceptance for a reasonable time of period.[1] This is bringing another question; at what time the contract becomes concluded? In English law, there exists postal rule which states that an acceptance communication of the offer becomes an effective effect at the time of posting, not at the time of receipt.[2] However, portal rule does not provide answer to the current communication means such as acceptance by e-mail; in which moment an acceptance becomes effective; sending e-mail, receipt of e-mail by server, dropping of e-mail to mailbox or opening of e-mail by offeror? Similar question can be asked for the written contracts. Many companies have strict internal regulations and sometimes it takes weeks to get all the signatures on the written contract. In the current contracts, the effective date of the contract is usually written which defines when the contract exactly becomes effective in order to avoid any confusion.

Construction contracts are complex contracts with many parts such as technical requisition, general terms and conditions, schedule, price list and payment terms, reference documentation i.e. drawings, specifications, procedures, general and specific terms and conditions and, it takes weeks and sometimes months to review and discuss each document for the contract conclusion. However, in fast track construction projects, it is required to conclude the construction within very short time even with incomplete engineering. Letter of Award, Notice to Proceed etc. are the commonly used forms. Letter of Award (term to be used for easy understanding in this Article, but it shall mean all similar forms) allows the construction contractors to proceed with mobilization and start of the works before the whole contract is signed. Meanwhile, parties continue to discuss the contract terms and upon having agreement on all details, the contract becomes ready for signature. However, there are some details that shall be taken into account before accepting Letter of Award from the client. It shall be listed there which activities can be carried out under the issued Letter of Award and the price to be paid to the contractor for execution of these activities. Also, Letter of Award includes the documents that shall form the whole contract, and acceptance of the Letter of Award would automatically lead to acceptance of all these documents which are still under discussion by parties and thus to conclusion of the contract.

In England and Wales and in Scotland, the courts do not require contracts to be in written form. For example in the case of Bear Stearns Bank pld. V Forum Global Equity Ltd.  [2007] EWHC 1576, it was held that an oral agreement over phone call for the sale of shares 2.7M Euros was legally binding.  There are a few areas in which the certain form of contract shall be followed, but in England, the court has a tendency to recognize the parties’ agreements. It can be stated that it is the general tendency in common law systems to allow the existence of the contract.

In Poland, Article 68¹ of Civil Code defines that in relations between entrepreneurs, a reply to offer with a stipulation of changes or supplements which do not materially change the content of the offer is deemed acceptance of the offer, and in this case parties are bound by the contract as worded in the offer, subject to the stipulations contained in the reply thereto while Article 72 of Civil Code states that if the parties hold negotiations in order to execute a specific contract, the contract is executed when the parties reach an agreement on all the provisions which were the subject of the negotiations. On the other, Article 648 of the Civil Code states that a construction works contract shall be in writing so that under Article 647, joint liability of investor for payment of remuneration due to the subcontractor for construction works performed by him can be granted.[3]

There are two sources of contract terms; express terms, and implied terms. Express terms are the ones the parties have specifically agreed upon while the implied terms are the ones not written in the contract but legally binding on parties by law.

Usually, the express terms are found in written contracts. That means when parties enter into a written contract, all the express terms shall be within that contract. Sometimes, parties can claim that in addition to the written terms, some additional oral agreement was also made. In English law, usually the courts consider only the written terms as valid which is known as parole evidence rule. Any party claiming that there were also oral agreements and whole contract was not written can challenge the parole evidence rule. Courts sometimes accept the existence of oral agreements, in the cases of J Evans & Son (Portsmouth) Ltd. v Andrea Merzario Ltd. [1976] 1 WLR 1078 and Couchman v Hill [1947] KB 554, the court accepted to overrule the written express terms based on the oral agreements. Obviously, the simplest and safest way is to put all agreements in written contract, and to avoid any further oral agreements and, in case any further agreement is required, to amend the contract accordingly.

As stated above, implied terms of the contract are the ones not written in the contract but binding on both parties by law. The law may be the governing law of the contract or the law of the place where the performance of the contract takes place.  For instance if the governing law of the contract is selected as English law for a performance of construction work, the liquidated damages shall be drafted in such a way that it shall reflect only the estimation of the damages that would be suffered in case of an occurrence of an event subject to liquidated damages (such as delay in completion of works). If the clause is interpreted as imposing of contractual penalty instead of recovery of damages to be suffered, it would be held as invalid since English law considers contractual penalty clauses as unenforceable[4].

There might also be implied terms of the contract by fact which the courts can say that the term is necessary to make the contract work as stated by the judge in the case of Ultraframe (UK) Ltd. V Tailored Roofing Systems Ltd. [2004] EWCA Civ 585:

  “If a surgeon undertakes to operate on a patient the term will be implied into the contract that he exercises reasonable care and skill in doing so.”

Therefore, implied terms can bring additional risks to the ones assumed in the express terms of the contract which may lead to unforeseen financial losses. The safest way would be either to accept only the know law systems as governing law of the contract for the performance of the contract in a known place, or to obtain a detailed legal opinion from a professional who has a wide knowledge on law systems applicable on the contract to be entered. Latter would bring some additional cost but would eliminate the possible financial losses due to invisible risks.

[1] See the court decisions in leading cases e.g. Byrne v Tienhoven (1880) 5 CPD 344; Henthorn v Fraser [1892] 2 Ch 27 at 32 per Lord Herschell.; The Brimnes [1975] QB 929 and Brinkibon Ltd. v Stahag Stahl [1983] 2 AC 34.

[2] Adams v Lindsell (1818) 1 B & Ald 681

[3] [3] Unal, Ulas Devrim, “Implications of Article 647(1) of Polish Civil Code: Guideline for Construction Companies Planning to Enter to Polish Construction Market (2018), https://turkishlawblog.com/read/article/47/implications-of-article-647-1-of-polish-civil-code-guideline-for-construction-companies-planning-to-enter-to-polish-construction-market

[4] Dunlop Pneumatic Tyre Co Ltd v. New Garage & Motor Co Ltd [1915]

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